Time flies when you’re having fun but even faster when you're in Small Business

Planning to Exit your Small Business in the next 15 years? What will the weather be like then?

Plans and Planning are different. For starters, plans are abstract. Anyone can have a plan. But planning is practical. And planning for a Small Business Exit, needs to begin at least 15 years before you expect to call it quits, slow down and retire.

Read in this article

Prepared for the worst, hoping for the best: Planning for what happens next and getting out of business on your terms

If you've ever been on a long-haul aircraft returning and preparing to land, you probably understand the frustration when you suddenly hear the Captions announcement, ‘flight traffic control advises there is a delay in landing and we're now entering a holding pattern until we receive permission to land’.

You then seemingly enter an endless ‘holding pattern,’ circling the airport that feels longer than the original flight - so close but still so far. To make matters worse, you might have taken off in the sun but are now landing in the rain and are unprepared for bad weather Either way, landing a 747 plane depends a lot on external circumstances that can disrupt your timetable and best laid plans – no matter what you had planned.

And so, it is with many small business owners approaching their retirement.

The preparation for the ‘retirement approach’ for a Small Business Owner, usually needs to start years before, with a look out kept on the future economic weather forecast.

Change doesn’t come easy to everyone

One day, all business owners will eventually leave their business – how and when that happens is the constant question that many business owners simply don’t know where to begin thinking through.

To leave my business on my own terms is what I would like – to have a backup plan in case that’s not possible, is what I need.

A business exit strategy is the first step in planning for business growth and its eventual future success with or without the business founder. To simply walk away from a profitable business all because there was no exit plan, is surely an unnecessary a waste of effort.

Thankfully, for many small businesses, learning and change is baked into our systems. Small business Partnerships are often more familiar with the impact of ownership changes. Whether that's through a competitor purchase, merger acquisition, retirement of the owner or even a forced exit of a business partner, due to an unexpected sickness, disability divorce, or even bankruptcy. Partnerships often regularly track the changes in their business valuation and as a result usually know what their business multiple is, compared to their industry benchmark.

What is a Business Multiple?

The ‘multiple’ approach is a comparable analysis method designed to value similar companies using the same financial and performance metrics. It’s a base guide to the expected value of a business, and once you understand what makes up a multiple, you have a better chance to improve it, long before a sale.

Many small business owners rely upon the successful sale of their business to allow them to actually retire. As a result, learning about business multiples, how they function and impact the valuation, needs to become part of a small business owners awareness.

Get to know Your Own Multiple

Multiples (or ‘Earnings Multipliers’) are used in business valuations as a way of multiplying the earnings of a business to reflect the sale value of a business.

Get to know Your Specific Industry Multiples

Each industry has different ways to assess the sale value of a type of business.

A lawn mowing franchise, may add up the value of all its contracts over a year and then multiply that figure by 3 years (said to be a multiple of 3x), to work out the typical sale price of the business.

• There are different types of multiples in use, but a standard version will multiply your earnings before interest and taxes (referred to as EBIT).
• This is referred to as an ‘EBIT Multiple’.

What can influence a Multiple

There are many variables which would either increase or decrease the valuation of your business and your resulting multiplier. These can include:

• Your Product Diversification - the less your business relies on just a handful of customers or products, and the more consistent your business performance can increase the multiple.
• The Level of Competition in your Market- the greater your competition (market saturation) the lower your multiple.
• Your Intellectual Property - the greater your point of difference (systems, IP and brand philosophy) and your advantages in the market, (high brand awareness) the higher your multiple.
• Expected Post Sale Expenditure - whether a buyer would be required to make substantial investments to retool the business, upgrade a building or machinery, or simply move in and plug n play with business as usual, will also affect the multiple.

Why start the Business Exit Conversation so early?

Pre-retirement planning is inherently complicated as you're looking over the horizon at events often 15-20 years ahead, making plans and strategies while trying to gauge the economic weather conditions you might face, as well as any changes in your personal circumstances.

• Start the conversation about, ‘What’s the plan to retire from Business’, early and normalise thinking about, planning for and learning about this part of business life.
• Understand what can change at the end of your retirement timeline
• Start to learn about what’s possible to stabilise your business today, so it can consistently increase in value and still be ready for use tomorrow.

Choosing the Best Time to Exit your business - Different Retirement Windows for small business owners

For those small business owners who looked to retire during the COVID19 pandemic, where interest rates on savings and investments dropped to a quarter of a percentage point (if you could find them), their retirement plans were upended, and many expectations had to be placed on hold, until the economic forecast changed.

• Those who had normalized the business exit conversation, who had taken an interest in the markets and protected themselves and their families with Life and Disability insurance, did well. The Pandemic risks to be managed and the delays to be worked with, was just another part of their business experience, and not a completely new one.
• Those small business owners who found themselves having to learn new financial concepts in the pressure cooker of an unexpected harsh economic environment, and who had no history of working with an advisor, did not do well.

Experiences of Small Business Owners exiting during the Pandemic

The COVID19 pandemic caused massive dislocation among many small businesses.
For some, rushed decisions, tunnel vision thinking and no professional network of adviser relationships to fall back on, saw many folks either abandon their business or pillage their superannuation using the government super early release rules.

“The Government Super Early Release scheme disproportionately impacted super fund members, with 13% of those who made a claim, emptying their accounts, taking out their super at a time when financial markets were historically down, with many more left with a balance of less than $1,000, putting them at risk of being left uninsured. …The long-term impacts of the scheme meant many fund members exited the pandemic years at ground zero when it came to their retirement security… and this was more prevalent for women, single parents and the unemployed.”

The future is unpredictable so avoid setting a hard retirement date

Setting a hard retirement date – especially when you’re in small business – is a luxury or a fantasy. Preparing for a soft landing and learning early about adapting to the changes and new financial circumstances, is the real skill to prepare for.

Ask you accountant for a business valuation

Small business owners tend to overestimate how much their business is worth, which is why conducting a business valuation is one of the important first steps in thinking about pre-retirement planning.

Where to from here?

For clients of Sapience Financial, pre-retirement planning starts some 15 years out from the anticipated retirement timeframe. Get used to having the business exit conversation, well before you all need to have the conversation.

We suggest as a minimum:

1. Get a regular business valuation every few years.
2. Make sure your business debt (including the Directors loan account) is fully insured for Sickness & Disability.
3. Have the valuation of the business insured against unexpected death or disability of a business owner or partner.
4. Stay connected to a business advise and a Risk Insurance Specialist like Sapience Financial.

That way, if you find yourself or your business partner forced out of the business due to terminal illness or disability, you’ll have the value of your business paid to the exiting partner in an insurance policy.

If you or your business partner unexpectedly pass away (statistically 1 in 10 of us will), then your family and dependents will have a legacy from your work to continue to financially care for them, rather than only the memory of a business you built, that passed away with you.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.